Marathon E.G. Holding Ltd. v. Cms Enterprises Co.

• Decision Date: 10 February 2010
• Docket Number: No. 09-20034.,09-20034.
• Citation: 597 F.3d 311
• Parties: MARATHON E.G. HOLDING LIMITED and Marathon E.G. Production Limited, Plaintiffs-Appellants, v. CMS ENTERPRISES COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

597 F.3d 311

MARATHON E.G. HOLDING LIMITED and Marathon E.G. Production Limited, Plaintiffs-Appellants, v. CMS ENTERPRISES COMPANY, Defendant-Appellee.

No. 09-20034.

United States Court of Appeals, Fifth Circuit.

February 10, 2010.

Edgar Ross Norwood (argued), The Norwood Law Firm, Liberty, TX, for Plaintiffs-Appellants.

Richard Alexander Rohan (argued), Carrington, Coleman, Sloman & Blumenthal, L.L.P., Dallas, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before HIGGINBOTHAM and STEWART, Circuit Judges, and FELDMAN,¹ District Judge.

FELDMAN, District Judge:

This litigation seeks to resolve a dispute concerning the scope of a contractual tax indemnity obligation. Appellants, Marathon E.G. Holding Limited and Marathon E.G. Production Limited (collectively, "Marathon") appeal the district court's grant of summary judgment in favor of appellee, CMS Enterprises Company. Marathon sued CMS for breach of contract arising out of CMS's refusal to indemnify Marathon for its payments to the Republic of Equatorial Guinea of: (1) $2,750,000 to in settlement of tax audits; and (2) $184,394.10 in withholding taxes. Marathon contends that the district court erred in determining that CMS was not obligated to indemnify Marathon for its $2.75 million tax settlement payment. Marathon further contends that the district court erred in determining that its claim to recover its payment of $184,394.10 in withholding taxes was time-barred. Unpersuaded, we reject both arguments and AFFIRM.

I. FACTS AND PROCEEDINGS

In this Texas diversity breach of contract suit, we must interpret a tax indemnity provision in a Stock Purchase Agreement (SPA). In the district court, Marathon sought to recover from CMS on two claims: (1) for CMS's breach of the tax indemnity provision of the SPA as to $2.75 million that Marathon paid to the Republic of Equatorial Guinea to settle certain tax audit claims; and (2) for CMS's breach of the tax indemnity provision of the SPA as to $184,394.10 in withholding taxes paid by Marathon for the month of December 2001. The district court ruled in CMS's favor on both issues on summary judgment.

CMS Enterprises Company, a wholly-owned subsidiary of CMS Energy Corporation, an oil and gas exploration and production company, was the parent company of CMS Oil and Gas Company. Until January 2, 2002, one of CMS's exploration and production operations was located off the west coast of Africa, in the Republic of Equatorial Guinea; CMS had a contractual arrangement with Equatorial Guinea in which CMS and its co-venturers produced oil, gas, and condensate offshore for export and sale.

On October 31, 2001, CMS and Marathon E.G. Holding Limited executed an SPA in which Marathon bought all of the issued and outstanding stock of three Cayman Island companies that held title to oil and gas reserves and had ownership interest in a liquefied petroleum gas plant located in Equatorial Guinea. On January 3, 2002, CMS sold to Marathon E.G. Holding Limited² all of its Equatorial Guinea assets through a stock sale.³

The negotiations leading up to the sale focused on the tax indemnity provisions. CMS's prepared financial documents showed that CMS had a large net operating loss on its books and on its tax returns filed with Equatorial Guinea. Specifically, as of December 31, 2000, CMS showed a net operating loss of $22,000,000, which CMS represented to Marathon had a tax asset value of $5,500,000. During the negotiations, Marathon requested that the draft SPA's proposed tax and indemnity provision be changed to expressly require CMS to indemnify Marathon for certain tax increases that might result from a reduction of CMS's net operating losses. In particular, Marathon proposed that Section 7.03 provide:

It is understood, however, that Seller [CMS] shall pay all Taxes resulting from the transaction contemplated under this Stock Purchase Agreement and that Seller [CMS] shall be liable for any Tax occurring after December 31, 2001 to the extent a net operating loss deduction is reduced or disallowed by the relevant Governmental Authority or a depreciation deduction is reduced or disallowed for bases incurred prior to January 1, 2002, ....

This provision, however, was not included in the final SPA.

In the same draft, Marathon also proposed adding a provision that would have obligated CMS to indemnify Marathon for any breaches of CMS's representations of "Tax Items" in Section 4.14(a) of the SPA. The proposed subsection (c) of Section 7.03 stated:

Seller [CMS] agrees to protect, defend, indemnify, and hold harmless Buyer ... from and against, and agrees to pay ... (c) any liability arising from a breach by Seller of its representations, warranties and covenants in Section 4.14 and Article VII.

This requested indemnity for CMS's representations of "Tax Items" was likewise not included in the final SPA.

Finally, Marathon also proposed a provision that would have required CMS to warrant the amount and availability to Marathon of certain "Tax Attributes," which included net operating losses. The proposed subpart (m) to Section 4.14 stated:

(m) Schedule ________ sets forth as of the date hereof (i) the basis of the Companies and the Alba Companies in its assets for Equatorial Guinea Income Tax Purposes, and (ii) the amount of any net operating loss, net capital loss, unused investment credit or other credit (collectively referred to as the "Tax Attributes") of the Companies and the Alba Companies for Equatorial Guinea tax purposes. These Tax Attributes will be available to Buyer.

This proposed provision also was not included in the final SPA.

Instead, after all of the meetings and drafts exchanged and discussions between the parties,⁴ the SPA's final tax indemnity provision provides:

7.03 Indemnification by Seller. Seller hereby agrees to protect, defend, indemnify and hold harmless the Buyer Indemnified Parties, the Companies and the Alba Companies from and against, and agrees to pay (a) any Taxes (net of any realized Tax benefits associated therewith) of the Companies or the Alba Companies (but only in an amount proportional to Seller's direct or indirect interest in the relevant Alba Company for the period to which such Taxes relate) attributable to the time period prior to January 1, 2002 (including, for the avoidance of doubt, any taxes of the Companies or the Alba Companies for the period prior to January 1, 2002 that are set forth on Schedule 4.14) but only to the extent such Taxes exceed the amount reserved for Taxes on the Settlement Statement ....

Notwithstanding anything to the contrary in this Agreement, no claim for Taxes shall be permitted under this Section 7.03 unless such claim is first made before the expiration of the statute of limitations (including applicable extensions) for the taxable period to which the claim relates or if no such statute of limitations exists, prior to the date on which such claim is otherwise barred by law.

Pursuant to the SPA, Marathon and CMS closed the sale in January 2002; CMS Oil was renamed Marathon E.G. Production.

At the time of the SPA closing, CMS had provided Marathon with a settlement statement, setting forth the amount of withholding taxes accrued for the month of December 2001, which were due to be paid to Equatorial Guinea in January 2002. On January 15, 2002, Marathon paid $245,825.39 in withholding taxes for the month of December 2001. CMS Oil had only accrued $61,431.29 in withholding tax liability for December 2001. As a result, Marathon paid $184,394.10 in withholding taxes for which it was not reimbursed by CMS. On January 21, 2005, Marathon notified CMS that it had made the withholding tax payment, and requested indemnity for $184,394.10. On receipt of the letter, CMS notified Marathon that CMS was reviewing the request. On October 3, 2006, CMS formally denied Marathon's claim for indemnity for the withholding tax payment.

Meanwhile, shortly after the sale in January 2002, Marathon received notice that the government of Equatorial Guinea was auditing CMS Oil's tax returns for the years 1997-2001. As of December 31, 2001, the size of CMS Oil's net operating loss had increased to $29,413,997.⁵ The government indicated that it sought a reduction in Marathon E.G. Production's net operating losses and a payment of additional tax as a result. Marathon, in communication with CMS, handled the negotiations with Equatorial Guinea. In May 2007, after lengthy negotiations, Marathon and Equatorial Guinea resolved all outstanding tax audit issues for the years 1997-2001. The settlement agreement provided that Marathon E.G. Production's $29,413,997 in net operating losses would be reduced by $11,000,000, which resulted in a revised net operating loss of $18,413.997. "This Tax Loss position reduction," the settlement agreement provided, "will result in additional taxes paid to the State of USD $2,750,000." Thus, in consideration of the tax audit settlement, which cancelled all tax claims for 1997-2001,⁶ Marathon agreed to and paid to Equatorial Guinea $2,750,000 in May 2007. On June 15, 2007, CMS denied Marathon's request for indemnity for this payment and again denied Marathon's request for indemnification as to $184,394.10 in withholding taxes.

This lawsuit followed. The district court originally denied CMS's motion for partial summary judgment on Marathon's indemnity claim for the $2,750,000 tax settlement. After Marathon filed a motion for partial summary judgment and CMS replied, however, the district court withdrew its prior Memorandum and Order and granted CMS's motion for partial summary judgment (and denied Marathon's motion for partial summary judgment) on the tax settlement claim. Later, the district court granted CMS's motion for summary judgment (and denied Marathon's cross-motion for summary judgment) on Marathon's claim for withholding taxes; the district court held that Marathon's claim for...